Built in the 90s, using materials that were modern at the time but are now a bit dated, with several extensions that were added as a “quick fix” when money was tight…

You might think we’re talking about housing, but in fact this is the story of many structured product platforms. Today, in a different and demanding business environment, the owners of these platforms know they need to upgrade.  But there’s a dilemma: do they spruce up the existing platform or start from scratch?

Everyone expects more

As digital banking and mass customisation become the norm, customers expect to be able to tailor products to meet their individual needs, price them on demand and have them issued immediately. And, with new distribution platforms promising even greater choice, issuers need to keep up with the functional requirements to connect.

Greater choice and customisation have an obvious consequence: more transactions, with a smaller average size.  Banks issued nearly 1.5 million new investment and leverage products in Europe during Q4 2018, according to EUSIPA’s latest report. And US sales grew by 15% in 2018 to the highest levels for a decade, according to mtn-i. But each product is still a standalone security, with all the legal and operational requirements that entails.

Meanwhile, the regulators also expect more from issuers, including stress testing each product launch, providing buyers with complex scenario analysis, complying with increasingly complicated prospectus regulation and monitoring the entire distribution chain.

What’s under the wallpaper?

Although existing tools may be functional for a core set of products, adding new capabilities often involves painstaking work to unpick code deployed many years ago, often as a temporary solution to an urgent problem but now embedded deep inside the platform.

What’s more, platform owners have often inherited multiple tools that perform similar functions, developed for different business lines, asset classes or regions. In theory, this provides an obvious case for consolidation but, under the lid, each of these tools has a slightly different purpose and regional nuance. This makes consolidation more complicated and the return on investment questionable.

Buy or DIY?

As they contemplate these challenges, platform owners have one more thing to consider – how to assess the plethora of FinTech offerings and emerging technologies that promise to transform the landscape and address all their problems. Some really are too good to be true but, more often, the problem is not technology itself but how to integrate it in an aging and inflexible infrastructure. Platform users are promised the dream in exciting demos but are left grappling with how to implement and whether to turn instead to their internal technology teams to build a solution.

Senior bank technologists are increasingly open to software-as-a-service, or even platform-as-a-service. However, the platform owner is still left with the risks and dependencies of bilateral connections to external providers and the complexity of migrating to the external service.

Show me the money

Banks’ technology budgets are notoriously challenging for platform owners to navigate. First, there is defining the right business case: “spend to save” or “invest to grow”. Either way, the return on investment needs to be justified or the investment will not come.

Then there’s the timetable. Whether it’s a major platform renovation or a complete rebuild, these projects are unlikely to be delivered in one fiscal year.  Banks’ budgeting processes are typically annual, so a platform owner has to try and deliver sufficient progress during the first phase to secure funding in subsequent years.

Commissioning external rather than internal development is increasingly attractive. Commitments are contractual, with fixed timeframes, fixed costs and clearly defined budgets. Other internal complications like recruitment processes and headcount can also be taken off the table.

So what is the answer? Renovate or rebuild?

Among major issuers and platform owners, who are managing under these complex circumstances, there is growing consensus: move to a new operating model based on some golden rules;

  • Develop new components in a service-oriented architecture
  • Use external tools and services to accelerate and improve capabilities but look for specialist providers who understand in detail how banks operate and how their tools will be deployed
  • Ensure that there is a clear and controlled migration strategy
  • Put appropriate controls in place to manage these services effectively
  • Retain the flexibility to change components in the future (internal or external)

Want to know more? Our specialists support structured product issuers across Europe and the US and would be happy to share their experiences.

Mark Aldous
Head of inSPire

Mark Aldous is Managing Director at inSPire, a specialist structured products managed service provider and consulting firm. Contact us to find out how inSPire can help you design, develop, implement and manage your structured product platform.